The Volatility Option Trade After Earnings in AutoNation Inc

AutoNation Inc (NYSE:AN) : The Volatility Option Trade After Earnings

Date Published:
2018-04-23

Disclaimer
The results here are provided for general informational purposes, as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation.

LEDEThis is a slightly advanced option trade that bets on volatility for a period that starts one-day after AutoNation Inc (NYSE:AN) earnings and lasts for the 6 calendar days to follow, that has been a winner for the last 3 years. We note the use of strict risk controls in this analysis.

AutoNation Inc (NYSE:AN) Earnings
In AutoNation Inc, irrespective of whether the earnings move was large or small, if we waited one-day after earnings and then bought a one-week straddle (using weekly options), the results were quite strong. This trade opens one-day after earnings were announced to try to find a stock that moves a lot after the earnings announcement.

Simply owning options after earnings, blindly, is likely not a good trade, but hand-picking the times and the stocks to do it in can be useful. We can test this approach without bias with a custom option back-test. Here is the timing set-up around earnings:

Rules
* Open the long at-the-money straddle one-calendar day after earnings.
* Close the straddle 7 calendar days after earnings.
* Use the options closest to 7 days from expiration (but at least 7-days).

This is a straight down the middle volatility bet -- this trade wins if the stock is volatile the week following earnings and it will stand to lose if the stock is not volatile. This is not a silver bullet -- it's a trade that needs to be carefully examined.

But, this is a stock direction neutral strategy, which is to say, it wins if the stock moves up or down -- it just has to move.

RISK CONTROL
Since blindly owning volatility can be a quick way to lose in the option market, we will apply a tight risk control to this analysis as well. We will add a 40% stop loss and a 40% limit gain.

In English, at the close of every trading day, if the straddle is up 40% from the price at the start of the trade, it gets sold for a profit. If it is down 40%, it gets sold for a loss. This also has the benefit of taking profits if there is volatility early in the week rather than waiting to close 7-days later.

RESULTS
If we bought the at-the-money straddle in AutoNation Inc (NYSE:AN) over the last three-years but only held it after earnings we get these results:

The mechanics of the TradeMachine™ are that it uses end of day prices for every back-test entry and exit (every trigger).

We see a 343.1% return, testing this over the last 11 earnings dates in AutoNation Inc. That's a total of just 66 days (6 days for each earnings date, over 11 earnings dates).
That's an annualized rate of 1,897%.

Looking at Averages
The overall return was 343.1%; but the trade statistics tell us more with average trade results:
➡ The average return per trade was 32.44% over 6-days.
➡ The average return per winning trade was 41.12% over 6-days.
➡ The average return per losing trade was -6.64% over 6-days.

Looking at the Last Year
While we just looked at a multi-year back-test, we can also hone in on the most recent year with the same test:

➡ The average return for the last year per trade was 39.82% over 6-days.

An Alternative
For the the more advanced option trader, a similar approach to this strategy would be to sell a strangle around this straddle turning it into an iron butterfly. You can test this approach in the CML Trade Machine™ (option back-tester).

WHAT HAPPENED
This is how people profit from the option market. Take a reasonable idea or hypothesis, test it, and apply lessons learned.

Please note that the executions and other statistics in this article are hypothetical, and do not reflect the impact, if any, of certain market factors such as liquidity and slippage.

Legal The information contained on this site is provided for general informational purposes, as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation. Consult the appropriate professional advisor for more complete and current information. Capital Market Laboratories ("The Company") does not engage in rendering any legal or professional services by placing these general informational materials on this website.

The Company specifically disclaims any liability, whether based in contract, tort, strict liability or otherwise, for any direct, indirect, incidental, consequential, or special damages arising out of or in any way connected with access to or use of the site, even if we have been advised of the possibility of such damages, including liability in connection with mistakes or omissions in, or delays in transmission of, information to or from the user, interruptions in telecommunications connections to the site or viruses.

The Company make no representations or warranties about the accuracy or completeness of the information contained on this website. Any links provided to other server sites are offered as a matter of convenience and in no way are meant to imply that The Company endorses, sponsors, promotes or is affiliated with the owners of or participants in those sites, or endorse any information contained on those sites, unless expressly stated.